Home bias could inadvertently harm your investment strategy. Here’s why

Are you sitting comfortably? Think carefully, because, when it comes to your investment portfolio, sitting too comfortably may mean that you risk missing out on potential growth.

As an expat, you may be tempted to weight your portfolio towards investments in your home country or the country you have settled in. This is called “home bias”.

While favouring a certain geographical region that you know and understand may feel comfortable, allowing home bias to steer your decisions could prevent you from diversifying your portfolio. 

As a result, not only might you be missing out on opportunities in areas you are less familiar with, but you also leave yourself open to the dangers of not spreading risk.

Read on to learn why home bias exists and how taking a more global view could help you to reduce risk and maintain positive returns.

Investors with a home bias stick close to home

Investors suffering from strong home bias will opt to invest in equities that are familiar to them and where they live. 

Investing in something familiar may make you feel like you have more control over potential outcomes. Conversely, investing in overseas companies may feel like you’re taking a risk, simply because you have less understanding.

For example, if you’re from the US or have relocated to live in the States, you may tend to lean towards investing in Walmart, Whole Foods, or Trader Joe’s. Likewise, if you’re living in Australia, you may favour the idea of investing in Woolworths or Coles.

Investors suffering from home bias will also tend to allow their experience of service companies to influence their investment decisions. 

In the US, for instance, your view of Verizon, AT&T, or T-Mobile, may be directly related to your personal experience of being their customer. While in Europe, you may feel drawn to invest more readily in Vodafone, Three, or O2 because your phone is tied to their service.

Invest globally using your currency of choice

Another element of home bias is that by investing in your country of choice, you’re more likely to also be investing in a currency you’re comfortable with. And you may prefer to trade locally so that your wealth isn’t further exposed to currency fluctuations. 

Yet it’s possible to invest globally without any need to juggle different currencies.

Depending on your geography, home bias may curtail your investment opportunities

The chart below shows the relative proportion of world stock markets. It clearly illustrates the size of opportunity you may be giving up if your home bias means you are avoiding investing in the US.

Source: Barclays

How to adjust your portfolio to reduce your home bias

If you tend to sit a little too comfortably and favour investments that are close to home, here are three steps you can take to address the problem.

1. Review your portfolio to check how your home bias may have affected your weightings

Realising that bias could affect your financial decisions can mean you’re in a position to spot the signs and start to make better choices. So, if you think you may have invested too heavily in one geographical area, review your portfolio to understand the extent of the problem.

Once you know where your money is invested, look at areas where you may be missing out on potential returns.

Your financial planner can help you adjust your portfolio to give you a balanced weighting that aligns with your appetite for risk and long-term financial goals.

2. Diversify your investment portfolio

Diversification is all about avoiding putting all your eggs in one basket.

As such, a well-diversified investment portfolio will mean you’re spreading your wealth over different geographies, types of investments, and asset classes. 

This is important when it comes to risk management as, in the event of significant market volatility, having a diverse portfolio may reduce your chances of incurring major losses.

Read more: Why diversification is key to protecting your wealth when inflation rises

3. Talk to a financial planner and remember you’re investing for the long term

When it comes to investing, the key point to remember is that your portfolio should be tailored to your goals. Remember too, that you're investing for the long term.

If you stick to the plan, a well-diversified portfolio that you create with the help of your financial planner should serve you well.

We are here to help. If you’re thinking of making an investment adjustment, your financial planner can discuss your concerns and goals and help ensure you stay on the right track.

Get in touch

To ensure that your portfolio is well-diversified and balanced according to your financial goals, please get in touch. 

Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455 to find out more.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.